THE PRESENT DILEMMA

The renewable energy industry in Australia has taken
more hits in recent years than a punch-drunk boxer. It may be
uncharitable to say that Australia's politicians were the only
ones throwing the upper-cuts, but there's little doubt
they've played a significant role.

The current state of the renewable energy industry in Australia
can be traced back to the repeal of the carbon price mechanism and
has been further compounded by the prolonged political impasse
surrounding the future of the Renewable Energy Target
(RET).1

Running parallel to the renewable energy sector's struggles,
is the pressure on governments to reduce spending in the face of an
undiminished social imperative to service the energy (and wider
infrastructure) needs of remote rural and indigenous communities
across the country.

In light of technological advances, off-grid renewable energy
should be a key part of the solution to energy security.

In funding such a solution, debt-funded models could be a more
practical way for industry to raise the capital it needs than
waiting for government funding.

For government, private capital investment has long been an
attractive funding solution for infrastructure projects as it
allows for the deferral of upfront capital costs.

Equally, financiers benefit from the certainty that comes with
government-sourced revenue streams – in this way
circumventing the uncertainty that has so severely hamstrung
renewable energy investment in recent years.

If a debt-funded model is to be pursued, the real question then
becomes: how to structure that funding to make it attractive for
all parties concerned?

CLOSING THE GAP

Renewable energy sources (in particular, solar and wind) have a
significant relevance in the off-grid setting of Australia's
remote rural and indigenous communities.

At present these communities are serviced almost exclusively by
off-grid diesel and gas. While these traditional fuels haven't
yet become prohibitively expensive, they are subject to price
fluctuations and, in the case of diesel, affordable only as a
result of government subsidies.

Fuel subsidies are also regularly under threat of repeal; and
yet renewable energy has made enormous progress in providing an
environmentally-friendly alternative which is competitive in terms
of price and efficiency.

Taking diesel and solar powered energy as examples: while the
cost of diesel generation has remained stable at around the
$220-$300/MWh mark, the cost of solar energy is now about
$200-$240/MWh; drastically down from $600/MWh in 2008 and likely to
get cheaper with evolving technology and economies of scale.

Combine the comparative cost with the obvious environmental
benefits of solar or wind and the case for their adoption looks
compelling.

'DO GOOD AND DO WELL'

Despite advances in renewable energy technology, the potential
upfront capital cost in deploying such technology to remote rural
and indigenous communities poses a significant challenge to
governments and local councils.

It's here that debt-funded models can play an important
role.

Financial institutions in Australia have retreated from
renewable energy investment primarily due to the uncertainty
surrounding future revenue streams.2

Whereas, a few years ago, revenue could be predicted with some
degree of certainty, financiers have seen modelling assumptions
irretrievably broken down with the repeal of the carbon pricing
mechanism, ongoing RET negotiations and the myriad of other
renewable energy initiatives identified for further governmental
review.

But what is being overlooked is the neat intersection between
the interests of governments and financial institutions.

If financial institutions can be satisfied that a renewable
energy project will generate certain and stable revenue (for
example, by linking it to or deriving it from a government source),
and governments see that deployment of such a project is available
through a model that reduces upfront expenditure, the incentives
for both parties to pursue investment really build.

POTENTIAL DEBT STRUCTURES

Assuming investors and governments are willing to get on board,
what structures and solutions could most effectively be deployed to
finance these projects?

A traditional loan agreement is a sensible starting point, and
in this context its worth exploring how this might operate with
local council involvement.

The council could borrow from a financier to fund the
installation of a particular renewable energy technology to provide
some or all of a community's energy needs.

The council could then utilise funds raised from existing rates
(or levy a new, "quarantined" rate for this specific
purpose) in order to repay the loan provided by the financier.

Similarly, and perhaps even more appealing from a balance sheet
perspective, would be to adopt an operating lease structure whereby
the financier acquires title to the relevant infrastructure and
leases it back to the council in a long-term arrangement that ends
with either the sale of the infrastructure to a third party or
acquisition by the council at the end of the term.

While each of the above examples involve the council procuring a
loan or lease from a financier directly, the same principles would
apply if a third party were to be used to fund, construct and
operate the project so long as it received ongoing payments from
the council.

Of course, these examples are only a taste of the variety of
funding structures that are available in this context.

It is worth noting how products such as social benefit bonds and
even US private placement (USPP) issues have been
utilised in recent years to fund social and renewable energy
projects – see for example the Hallett Hill Wind Farm USPP
and the NSW/Treasury / Benevolent Society Social Benefit Bond.

WHERE TO FROM HERE?

Whatever the ultimate structure or approach taken, one thing is
certain: debt-funded renewable energy is a sensible, cost-effective
and environmentally responsible solution to meeting the energy
needs of Australia's remote indigenous communities.

Now that the distraction of RET negotiations has been dispensed
with, local councils, State and Federal Government, and financial
institutions should be better placed to redirect their attention on
opportunities to collaborate in order to provide basic
infrastructure and energy security to some of Australia's most
isolated and marginalised communities.

2 The impact of the continued uptake and advancements
in household solar and battery products on the earnings of
traditional energy producers is also likely to provide some food
for thought for financial institutions. See generally, Rob Koh and
Stuart Baker et al, Morgan Stanley, Australia Utilities –
Asia Insight: Household Solar & Batteries (19 May
2015).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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